Southwest Airlines Co. — 2024 Q1

Yes. Mike, thanks for the question. First of all, we are thrilled to have an agreement with our wonderful flight attendants. And at the end of the quarter, we had roughly $625 million accrued for labor agreements that we expect to pay out for the remainder of this year.

Yes. Mike, the -- we can move technology time lines around by reprioritizing things here and there. And so some of the gating -- there are crew scheduling changes that need to be made on a -- from a red eye standpoint. There are some changes that need to be made with some of our operational systems. And we can choose how fast or how fast to do those things and what elements go before or after them. So the 2-year was a rough estimate. We can go faster than that if we choose to do so. But it's just kind of a myriad of technology-related items.

Yes, this is Andrew. I'll add on. Some of the kind of bigger issues that slowed us down was with our crew contracts, our reserve periods. We had 2 reserve periods, for the pilots, in particular, and didn't allow for good coverage of red eyes. And so with a new contract, we'll eventually go to 3 reserve periods and allow us to better have reserve pilots on standby should there be a problem.

And Mike, this is Bob. You didn't ask this, but on the why, maybe not just the. Timing. But obviously, we've known for a long time, our customers want red eye flying. It's a little bit limited in scope, but there are red eye flights that are very desirable for our customers. And so we wanted to do this.

You bet, and thanks for the question. I think maybe I'd just start a little wider, which is we are always studying what our customer preferences are and if they're changing. That's now, over time -- and we're committed to meeting them. It's over time, we've added things like WiFi, and now we're adding seat power. We've added larger overhead bins, and so we're committed to meeting our customers' preferences.

Well, we just don't -- I don't want to get into details because a lot of those we don't have. Again, we're looking at customer preference. Obviously, the -- how would you do it technically, how long would it, what impact, if any, would it have on the operation? Obviously, what's the financial impact?

And I'd add, Bob, our PSS is the industry standard Amadeus tool, which obviously works in those environments. So the underlying system is not prohibited from doing that.

That's right.

Duane, I think there is definitely regional performance. I mentioned in the prepared remarks that the West Coast did well. Particularly intra-Cal RASM and margins are up double digits year-over-year. Phoenix is doing really well. Vegas is doing really well. Of course, Vegas had some assistance there with the Super Bowl being there in February in the first quarter.

Yes, Duane, thank you. And again, I'll just remind you that we're -- this is all very fluid as we work with Boeing on their delivery estimates. And obviously, '25 is more fluid than '24. And also, we are choosing how work -- so as we get some indication from Boeing, we're choosing how we're going to plan, which may be different because we don't want to have to go through this replanning the schedules over and over and over because it's very, very disruptive.

No. The only thing I just might reiterate is we'll look to align our capacity growth for 2025 with demand. So we've got a little bit of time here. And obviously, one thing I'd point out is we do have fleet flexibility by design. So we'll continue to evaluate that. And then just at a higher level, again, we do plan to grow below macroeconomic growth trends until we get our financial going in the right direction to achieve our goals.

And maybe the other thing to add, too, just to disconnect from Boeing, is the work on the network that work to moderate -- significantly moderate our capacity isn't just Boeing. I mean, this is something we need to do. We need to manage ourselves, manage our appetite, continue to mature the network, continues, as Ryan said, to work on the part of the network that is underperforming and moderate our capacity until we are hitting our financial targets.

And I think you take the sources of growth that Bob talked about and the network restructure, that does imply that our central tenancy is for seats to trail ASMs and for trips to trail seats. That's a natural consequence of those actions.

Yes. Jamie, we're focused, as Bob said, on generating free cash flow. Ultimately, we're working to restore our financial returns. So this year, we're very focused on what we can control. And we are working on lowering our CapEx. That's already come down quite a bit, as we've already shared. And just in terms of the liquidity targets that we have established with our Board, we do have a minimum cash target of $6 billion, which, of course, is on top of our revolver. So we're really working to manage, obviously, our operating cash flows and very focused on that, as we've taken you through in our remarks, and also working to balance that with our capital spending.

Yes. Jamie, there's a lot in your question. So let me just start with we -- just to balance things out. Our financial returns are nowhere close to what we need and what we want them to be, period. And we will be relentless until we achieve those. The company -- so that is absolute.

If I might, just on the business revenue, that was a good performance here. I was curious what your 2Q outlook is reflecting in terms of expectations and what you're seeing there.

Savi, yes, managed business was up very healthy in the first quarter, up 25% and reached a significant milestone in getting back to flat to 2019 levels. So we were really pleased with that. That was driven by a double-digit increase in unique travelers traveling under a contract in the managed business space. So that just means we're penetrating deeper into accounts. We're growing the number of companies under accounts, and we continue to pick up market share there.

That's helpful. If I might just ask just a question related to CapEx and just given your current outlook. Thoughts, Tammy, on kind of free cash flow generation here and kind of looking forward a little bit, what's realistic?

Yes, Savi. We're -- as we said, we're expecting CapEx this year at $2.5 billion, and that includes about $1 billion in aircraft spend. We are working through our plans for next year. So it's a bit early to give you guidance for next year. Obviously, we're working through that actively now. So we'll update you on our CapEx spending plans as part of our comprehensive update in September at our Investor Day.

Is the view that kind of -- is free cash flow generation important and possible? Or how are you thinking about kind of translating that CapEx into what...

We are absolutely working with the view to generate free cash flow. We -- so that will obviously be part of the equation as we pull together our plan for next year.

Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, could you remind us and share instructions on how to queue up for questions?

Well, it's never -- I'll just start with this. It's never an easy decision to close a station or to materially reduce flights in the station. We love our airports. We serve our communities, and so it's always difficult.

No, you covered it, I think.

We have a very -- as you would expect, we take care of our employees, we take care of our partners, and we have a very rich communication plan that -- to go in the right order, to make sure we communicate with folks, it's done with compassion. Our employees will be offered jobs in other cities. And so they have a lot of options. But no, we handled all this, as you would expect, Southwest Airlines to handle it.

Yes. We staged senior leaders there last night. So at very early morning hours, our people -- our leaders were there to explain the whys to the employees as well as to the airports, and then also to go through with them the different options they'll have for moving. It's a seniority-based system with our unions, and so how that will all work for them. And so they've gone through that.

Yes. They will remain employed, so they choose to do so.

There are about -- we took about half of O'Hare down from about 30 something flights to about 15, 18 flights during the seasoned day of the week. So it's about a 50% reduction in Atlanta. I can't remember off the top of my head, Ryan. It was 30%, I want to say, off the top of my head.

Yes, about 1/3.

Yes, it's unfortunate. We had been restoring Atlanta over the course of post pandemic. We could never quite get back to the level of performance we needed there at the scale we needed. And so it's been reduced back down to a level just shortly coming out of the pandemic. And so it's still substantial activity there, it's just not as big as it was before.

Mary, it's Ryan. Well, it's new. As you know, it was just issued yesterday. So we're digesting exactly what all of that means. But based on our read, so far, I don't expect that it's going to be a significant impact. Of course, we already have the most customer-friendly policies in the industry. So we're best positioned to comply with any of these new regulations out of the gate.

We -- I'll just give you a little overview and then, obviously, Ryan can jump in. We -- this is something that we look at. So we study, we survey to understand our customers' views, and whether anything that's going on impacts their view of Southwest or the industry generally.

Yes. The only other thing that I would add is that we certainly are serving on the front end to see how top of mind it is for consumers when they're making a booking. And then we also look at cancellations and ask customers once they cancel a flight, what their reasons for cancellations were. And safety concerns or a Boeing aircraft as a result of that on the cancellation side is 1% of our cancellations. So it's a very, very small number, not material, I don't think, to the overall picture.

I think the markets themselves were just performing at a level that we needed to make the tough choice to remove them from the network. And I don't think that a smaller aircraft would have had a material difference on those markets.

You bet, Dawn. Thank you. I think the -- it's what you say that the difference is we -- this is something that we look at on sort of on the surface pretty regularly. But in terms of a very deep dive of understanding customer preference and what we might do, that's something we do less frequently.

Yes, I would agree with that on the incremental products. But what we are doing and what we can continue to do is to get better at how we price those products and drive incremental yield from those ancillary products.

No, you're -- you -- I think you're exactly right, which is that's why you want to look at all of these things. And we're just not ready to tell you exactly what we're studying, and we're not ready to tell you then how that could, if we decide to go forward, turn into a different product design and a plan. But yes, just conceptually, that where you're going is the reason we're looking at this is we know, over time, customer preference has changed. They have my whole 36 years here at Southwest Airlines.

David, thank you. And yes, no, thanks for allowing me the ability to clarify that. We have line of sight on the 2,000 that does not include furloughs. or anything like that, that we don't want to put on the table. And then it also does not include a headcount that are effectively sort of out of the workforce in terms of not being paid because they are on voluntary unpaid leave. So it doesn't even count that.

Yes. I don't think we give a breakdown by work group, David. There'll be some that will be back office, i.e., people that work at headquarters, some that will be at frontline. We have -- there's natural attrition that goes along throughout the company, whether one reaches retirement age or one decides to go find a different job. You have that natural.

Leslie, I'll try and take all of those. The first one on what we're learning from customer research, I think just stay tuned there. We'll have more to share on what we're learning and how that factors into what we may do different, if anything, at all. I will say though, the Southwest Airlines is -- we will stay true no matter what we do to the brand and who we are and how we approach customers. And I think things like curtains and things like that are a bit far field from who Southwest Airlines is.

Yes. And I'll just quickly emphasize on that, Leslie. It's not 1% of our bookings that got canceled because of all of those people who canceled. And so yesterday, 0.4% of people canceled and 1% of that, 0.4%, said it was safety concerns. So it's a very small number of an extraordinarily small number that did that, which is why Ryan would say it's immaterial or even inconsequential.

That was also quite small. I mean we also track people who look at what the aircraft type is on the website, and those really didn't see any movement of consequence in there. And so it seems like this is not something that customers investigate any great deal. With the very early days of the MAX grounding, there were some interests heightened to that.

Rajesh, this is Andrew. And so what we're doing right now that we've spoken of is the voluntary time-off has roughly been with our ground operations, flight attendants and some of our call center people. They've taken advantage of that for flexibility in their programs. We do not have anything with our pilots at the moment. A provision of our contract requires us to consult with them, and we will certainly do that before we do anything with regards to our pilots.

Andrew, again, I'll take that because I was up there with Bob on our visit. And so really, we're impressed by how Boeing is putting kind of quality ahead of short-term profit, so to speak. So an example is, they have many portions in their factory. There's like 10 stations they go through the construction. They don't allow anything to progress past stage 3 that has troubled work. And so that creates gaps in their factory, which then leads to obviously a plane that's not sold and delivered that month.

Yes. You want to see the tone at the top be appropriate, which is an understanding that -- again, I can't speak for Boeing. I'm just thinking about how we view this. But a tone that recognizes that this is a big issue, and it's bigger than a quality escape. And to some extent, it is a cultural issue. And so they need to attack it very broadly.

Thank you for the question. In 2022, we increased from having just a representative, which other airlines have, to having a team of AMP-certified mechanics on process, on site to inspect our aircraft as they go through the production process. I believe there's north of 85 inspection points that they look at between entering the factory and exiting the factory.

Ryan can give you much more detail, but I think you want to know all those things. You want to know why do customers book Southwest? What do they expect of Southwest? You want to know why do they book others and not Southwest Airlines. You want to know if they have preferences for other things within our product that we don't offer today, how do you think about pricing, those kinds of things and how it affects their desire to book Southwest Airlines.

I think you hit it all. Clearly, with any sort of transformational change, you're going to have a very robust, highly scientific, very sophisticated statistical models and research methodologies to test all of those things that Bob walked through. that's what anybody would expect of a company like Southwest, and that's the rigor at which we are approaching studying this issue.

Look, we're going to study customer -- like we've said, we're going to study customer preferences, but there's strong demand today for Southwest Airlines and the brand that we put and the product that we put in the marketplace today, it has worked for us for over 50 years, and customers understand well who we are and what we bring to the marketplace. We're not going to try to be somebody that we're not. And so we'll study it all, but we're -- at the end of the day, we're going to remain true to who Southwest Airlines is.

I think you also have to look at the revenue per square foot you get in the cabin, and so it can be seem like you may want to have a fancy product. But if it doesn't generate revenue off of that square foot you have in the cabin, then it's necessarily not worth it. So we take a strong eye to the revenue that any of our products would generate as we evaluate this.

And I think the -- I know we've said this probably 20 times on the call today, and I think the other short answer is we're not ready to go into detail. We have work to do here, obviously, to continue to finish up our work. And then if there are things we do want to change, understand how we would do it in the Southwest way. And so we will be back with detail when we're ready. And if there is something that we're going to change, we're aiming to do that at our Investor Day, which is planned in September. And we'll share, obviously, a lot more then.

Thanks to everyone who joined us today. If you guys have any further questions, our Communications Group is standing by. Their contact information, along with today's news release, are all available at swamedia.com.